U.K. Bank Revival Offers NAB a Clydesdale Exit: Real M&A
National Australia Bank Ltd. (NAB) may now have a better shot at selling its $4 billion U.K. unit after more than a decade of failed attempts to bulk up or exit the business.
Clydesdale Bank, the Glasgow, Scotland-based lender owned by NAB, is expanding profit margins on its loans at the same time that mortgage demand is rising and defaults are shrinking. U.K. banks have rebounded from post-financial crisis lows and are now, on average, trading above the value of their net assets, according to data compiled by Bloomberg. Morningstar Inc. said Melbourne-based NAB may aim to sell Clydesdale for close to its book value of 2.41 billion pounds ($4 billion).
NAB failed to acquire the U.K.’s Abbey National Plc in 2002 and said in 2009 it must expand in Britain or leave. Banco Santander SA (SAN), which considered buying branches from Royal Bank of Scotland Group Plc two years ago, is among possible suitors for Clydesdale as the local economy picks up, said Above the Index Asset Management Pty, a shareholder in NAB. A sale would let NAB focus on more lucrative areas at home in Australia, said Morningstar.
“If the recovery in the U.K. continues during 2014, it’s going to become increasingly likely that that type of disposal will occur,” David Ellis, an analyst at Morningstar in Sydney, said in a phone interview. “There’s a general improvement in confidence.”
NAB, Australia’s fourth-largest bank based on its market value yesterday of A$80.6 billion ($71 billion), acquired Clydesdale in 1987. By 1993, it said it was scouting for more assets in the U.K. Nine years later, London-based lender Abbey National rebuffed NAB’s takeover attempts.
In 2004, NAB opted to sell Irish assets acquired through the Clydesdale deal to Danske Bank A/S for 967 million pounds and increase investment in Britain. The entire Irish and U.K. business was valued that year by Credit Suisse First Boston at A$11 billion.
The U.K. strategy hasn’t worked, NAB Chief Executive Officer Cameron Clyne said in 2012. Clydesdale had become over-reliant on commercial property, where bad debts were rising, he said. Clyne, who has been CEO since 2009, transferred real-estate loans from the U.K. to the group balance sheet and announced at least the third round of job cuts in Britain under NAB’s ownership.
For years, analysts and NAB executives said Clydesdale was too small to generate acceptable returns. Outstanding loans at the business were 26.5 billion pounds at the end of September. That compared with net loans of 110.5 billion pounds at RBS’s U.K. retail business alone.
The reorganization in 2012 left Clydesdale focused on individual borrowers and smaller businesses.
“While disposal of the U.K. business has not proved possible to date, the major restructuring we undertook last year is beginning to bear fruit,” NAB Chairman Michael Chaney said at the bank’s annual shareholders meeting last month.
Meaghan Telford, a Melbourne-based spokeswoman for NAB, declined to comment on speculation when asked if the bank may try again to sell Clydesdale this year.
NAB reported a cash profit of 96 million pounds in the U.K. in the year ended Sept. 30, compared with a loss of 139 million pounds a year earlier, regulatory filings show. In the region, the company’s net interest margin -- a measure of lending profitability -- improved 9 basis points, or 0.09 percentage point, to 2.12 percent. Clydesdale’s housing loans grew 7.5 percent in the period.
“The improving U.K. economy will increase the interest in NAB’s British assets, which have possibly passed the worst of the bad-debt cycle,” David Liu, Sydney-based head of research at Above the Index Asset Management, which manages A$450 million including NAB shares. Santander, Spain’s largest lender, is among possible European buyers of Clydesdale, he said.
Representatives for Madrid-based Santander didn’t immediately respond to requests for comment.
NAB shares fell 0.4 percent to A$34.16 at the close in Sydney. The stock has fallen 1.9 percent this year.
The U.K.’s Office for Budget Responsibility last month raised its forecast for economic growth in 2014 to 2.4 percent from 1.8 percent. Home loan approvals in November surged to the highest level in almost six years, data from the Bank of England show.
The improving economy has lifted valuations of Britain’s banks and increased the chance of a sale of Clydesdale, said Ellis at Morningstar.
The FTSE 350 Banks Index, which tracks six U.K. banks including RBS and Barclays Plc, has a price-to-book ratio of 1.03, according to data compiled by Bloomberg. The index’s valuation had fallen as low as 0.65 in 2011 after trading at 1.31 times book value in early 2010, the data show. RBS is Britain’s largest state-owned bank, while Barclays ranks as the U.K.’s second-largest bank by assets.
“Valuations have improved, the macro outlook is better and the regulatory environment has improved as well, or is at least becoming clearer,” Mike Trippitt, a London-based banking analyst at Numis Securities Ltd., said by phone. Clydesdale could be listed in an initial public offering or bought by private-equity firms, he said.
Even if this year offers NAB its best chance of selling Clydesdale to Santander or another acquirer, there’s no guarantee bids will match its book value, said Brett Le Mesurier, an analyst at BBY Ltd. in Sydney.
Anything more than 2 billion pounds “would be an absolutely outstanding outcome,” he said by phone. “Even if they got rid of it at half book, it would be a win.”
Clydesdale needs to show it has scope to generate a return on equity, or ROE, of at least 10 percent, more than double last year’s figure, said John Buonaccorsi, an analyst at CIMB Group Holdings Bhd. in Sydney. The job cuts, which should reduce costs, will help, he said.
“Clydesdale could attract a buyer if it can demonstrate ROE improvement,” Buonaccorsi said by phone. “Once they show that, they can easily get at least book value.”
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